Gratuity Setup - How system will calculate gratuity, setup in Configuration Manager

Gratuity is a monetary benefit provided by employers to employees as a reward for their service. A recent amendment has increased the tax exemption limit for gratuity from ₹10 lakh to ₹20 lakh under Section 10(10) of the Income Tax Act. This exemption applies to gratuity received upon retirement, death, resignation, or disablement occurring on or after March 29, 2018.

Understanding Gratuity

Gratuity is not part of the regular salary and is governed by the Payment of Gratuity Act, 1972. It is payable upon:

• Superannuation (retirement)
• Retirement or resignation
• Death or disablement due to an accident or disease (the 5-year service requirement does not apply in these cases)

To be eligible for gratuity, an employee must have completed a minimum of 5 years of continuous service. This benefit is not available to interns or temporary employees.

Eligibility Criteria

Gratuity is payable if the employee meets the following conditions:

• Must be a full-time employee (interns/apprentices are not eligible).
• Must have completed at least 5 years of continuous service.
• Eligible events include resignation, superannuation, disablement, or death (5-year rule waived for death/disablement).

Employees Covered Under the Payment of Gratuity Act

The Act covers employees working in various sectors, including:

• Factories
• Mines
• Oil fields
• Ports
• Railways
• Plantations
• Shops and establishments
• Educational institutions with 10 or more employees.

Once the Act applies to an employer, it remains in effect even if employee numbers drop below 10.

Calculation of Gratuity Exemption

The least of the following is exempt from tax:

• Last salary (basic + DA)* number of years of employment* 15/26;
• Rs.20 lakhs 
• Gratuity actually received

Example Calculation

Let us understand this through an illustration: The last salary drawn by Rohan is Rs.1 Lakh per month (basic + DA). He is entitled to receive a gratuity of Rs.11 Lakhs. He has been in employment for the last 19 years and 7 months.

Important Points

• Gratuity is calculated as 15 days' salary for every completed year of service.
• The number of years is rounded off to the nearest full year.

Employees Not Covered Under the Payment of Gratuity Act

Employers are permitted to pay gratuity to employees even if their organization is not governed by the Payment of Gratuity Act. For these employees, gratuity is typically calculated as half a month's salary for each completed year of service.

Calculation of Gratuity Exempt from Tax

The exempt amount for gratuity is determined by the least of the following:

1. Average of Last 10 Months’ Salary (Basic + DA) × Number of Years of Employment × 1/2
2. ₹20 lakh (the maximum exemption limit)
3. Gratuity Actually Received

• Last 10 month’s average salary (basic + DA)* number of years of employment* 1/2;
• Rs.20 lakhs 
• Gratuity actually received

Gratuity exemption for such employees would be computed as follows: 

Raghav has been in employment for 25 years and 2 months. The average salary for the last 10 months is Rs.90,000. The actual gratuity received by him is Rs.11 Lakhs.

Frequently Asked Questions

1. Is the gratuity received on retirement taxable for a government employee?
 No, gratuity received on retirement is fully exempt for government employees.

2. Which employers are required to pay gratuity to their employees?
 Employers with more than 10 employees are required to provide gratuity. Employees must also have completed a minimum service period of 5 years under the same employer to be eligible.

3. What is the maximum exemption for gratuity for non-government employees?
 The maximum exemption limit is ₹20 lakh, applicable regardless of whether the employer is covered under the Payment of Gratuity Act, 1972.

4. Who is not eligible to receive gratuity?
 All employees who have completed 5 years of service under the same employer are eligible for gratuity, except for apprentices.

5. What is gratuity in salary?
 Gratuity is a monetary benefit paid by the employer as a token of appreciation for the services rendered by the employee during their employment, recognized under the Payment of Gratuity Act, 1972.

6. Is there a time limit for gratuity payment?
 Yes, gratuity must be paid within 30 days from the date it becomes payable. If not paid on time, the employer must pay interest on the due amount until it is settled.

7. How is gratuity calculated?
Gratuity payable = Last drawn salary × 15/26 × Number of completed years of service.
 (Salary for this calculation includes Basic + Dearness Allowance.)

8. Is gratuity received taxable in the hands of the employee?

• For government employees: The entire gratuity amount is exempt from income tax.
• For other employees: The exempt amount is the least of:
  1. ₹20 lakh
  2. Actual gratuity received
  3. Last drawn salary × 15/26 × Number of completed years of service

9. When is gratuity payable?
 Gratuity is payable upon:

• Termination of employment after at least 5 years of continuous service
• Superannuation
• Retirement or resignation
• Death or disablement due to accident or disease (5-year rule does not apply for death/disablement)

10. I have completed 4 years and 245 days of service; am I eligible for gratuity?
 Yes, if you complete 250 days of service in the 5th year, you are deemed to have completed 5 years of continuous service.

11. Does continuous service include leaves?
 Yes, continuous service includes any leaves, breaks, or absences for any reason.

12. Is gratuity calculated until retirement in case of death?
 No, gratuity is calculated only based on the completed years of service, not extending to the retirement period.

13. What should I do if my employer refuses to pay gratuity?
 You can file a claim or complaint with the Controlling Authority (District Labour Officer) using Form N within 90 days of the gratuity becoming payable.

14. How much is gratuity in Cost to Company (CTC)?
 Gratuity typically accounts for around 4.81% of the basic salary and dearness allowance.

15. What are the new gratuity rules for 2024?
 Organizations will be required to pay a minimum of 50% of employee salaries as basic pay. If an employee's basic pay is below this threshold, employers may need to restructure salary packages to comply with the new gratuity rules under the four labor codes.

16. Is the notice period included in gratuity calculations?
 Yes, the notice period is included. Completing 240 working days in the final year is sufficient for gratuity eligibility.

How to configure Gratuity exemption in the Portal

Login with Portal

Click On Setup circle

Click on Payroll & Compliance

Select Payroll & Configuration Manager. Click on Go

Select FNF for configure

Select Gratuity Base Year in Days – 1650 or 1700. Click on Save